This morning the President announced that his Administration, acting unilaterally after Congress declined to intervene, will bail out the auto industry to the tune of $13.4 billion now, another $4 billion in February, and who knows how much thereafter.
What a terrible proposal!
First of all, this is a bailout, plain and simple. Sure, the White House will point to a long list of requirements in the deal’s terms as proof that this isn’t just another bailout. But that’s bogus: this is a politically-driven plan and none of the important concessions listed by the White House are binding or likely to happen.
That’s because, unlike in a bankruptcy court, this bailout offers no accountability.There is zero chance that the government will require General Motors or Chrysler to pay back these loans if they are unable to right themselves by March. It is, as Mickey Kaus has put it, too big a stick for the government to ever use.
Second, it’s an end-run around our representative democracy. Congress spent over one month debating whether and how to support the automakers and, in the end, decided to put no taxpayer money on the line. The White House’s action today nullifies that congressional decision, violating the constitutional command that the legislative branch makes law and the executive branch enforces it.
Third, it’s just a down-payment. According to industry analysts and economists (e.g., Mark Zandi), future bailouts, or eventual bankruptcy, are inevitable. How much will it cost? Zandi says up to $125 billion.
Fourth is another small problem: this bailout is illegal. The administration does not have the legal authority to use funds from the bank bailout in this way. Congress earmarked that money for “financial institutions,” which automakers clearly are not. It’s not even a close call.
Worst of all, though, is that this bailout just won’t work. Put simply, if the goal is turning the automakers around to achieve long-term profitability, this bailout is clearly inferior to a straightforward reorganization under Chapter 11 of the bankruptcy code, which so many large corporations have relied upon to escape dire financial straights and return to profitability. A bailout actually makes achieving this goal less likely.
The bottom line: Bailing out the automakers is legally wrong, economically wrong, and actually counterproductive to turning around these troubled businesses.That’s a terrible trifecta.